UK retirement vs the best in the world

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Do our counterparts in other countries get a better deal on annuities or do
they have other products that provide a bigger income in retirement?

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If you think annuity rates are bad in this country, spare a thought for Irish
pensioners. They get about 4.9pc if they retire at 65, compared with about
5.8pc in Britain. But is there anywhere in the world that savers can get
attractive annuity rates? Or have any countries found other means of getting
a retirement income to offer pensioners a better deal?

The week The Daily Telegraph investigates how other nations deal with
the problem of converting pension
savings into a regular income, and how their approaches compare with the
British system.

While annuities attract a lot of criticism this newspaper disclosed last
week that some annuity companies make profit margins of about 20pc, and
others are thought to make even more they offer the only means of
guaranteeing a specified income for life. Other means of providing a
retirement income offer more flexibility and the chance of a higher income,
but there is always the risk that you run out of money before you die.

In many countries, people are particularly exposed to this risk because there
are no restrictions on how pension pots are used.

In fact, the British system of forcing pension savers to use most, but not
all, of their accumulated savings to produce an income is the best in the
world, according to David Knox, author of the Melbourne Mercer Global
Pension index, which compares pension arrangements around the world.

"It's actually quite rare for pension savers to be required to put their
savings towards an income," he said. "[But] the primary objective
of a private pension system should be to provide income during retirement."

However, while savers should be required to use most of their money to provide
an income, they should also be allowed to take some of their pension as a
lump sum, he added. "Britain has struck this balance better than anyone
else," Mr Knox said. Some countries, including Canada, Holland and
Sweden, force savers to convert their entire pension pots into an income
stream, although the income can come from a "drawdown" product
rather than an annuity.

The Canadian annuity market is broadly similar to Britain's but rates are
better; a 65-year-old Canadian can get as much as 6.7pc, according to
lifeannuities.com, a Canadian comparison service. The Irish system also
resembles Britain's, although rates are lower. While the UK's annuities tend
to be based on gilt rates, Irish insurers tend to buy French and German
government bonds Ireland (OTC BB: IRLD - news) 's bond market was badly disrupted by the eurozone
debt crisis. Unfortunately, while French and German bonds are seen as safe,
returns are low.

However, the Irish annuity market is pretty competitive, according to Barry
Mooney of Invesco (NYSE: IVZ - news) , an Irish pensions company unconnected with the British
fund manager of the same name.

Holland's relatively small annuity market is different, however. In common
with several other northern European countries including Denmark, Germany
and Belgium, the Netherlands' market is dominated by "guaranteed
deferred" annuities.

These share some characteristics with the investment-linked annuities sold in
Britain, where your income depends to some extent on investment performance.
However, the Dutch version is part of an integrated pension product taken
out earlier, during the accumulation phases. Bonuses are added both before
and after you start to take an income, subject to a minimum specified at the
outset.

Annuities in Sweden, which are provided entirely by the state, are also
investment-linked. Similar products, although not state-provided, are
popular in America and Japan.

Some countries, such as France and Singapore, require only small proportions
of pension pots to be used to produce an income.

In countries where there is no compulsion to buy an annuity with the majority
of your savings, the market for annuities tends to be small and
underdeveloped there seems to be a worldwide reluctance to buy them
voluntarily.

Annuity markets in France, Italy and Japan are small, mainly because of
relatively generous state pension systems and occupational pension
arrangements.

"Italy has a very generous state pension; as a result I think only a few
hundred annuities are sold in the country each year," said Edmund
Cannon, an academic at Bristol University who is an expert on annuities.

It will come a shock to many savers, but Britain has the most advanced annuity
market in the world, experts say. In particular, other countries are not as
advanced in offering "enhanced" annuities, which pay more to those
with reduced life expectancy, and inflation-linked incomes.

What happens in countries where there is no requirement to buy an income
stream?

"In many countries there is no need to buy an annuity total
flexibility is much more common," said Stephen Ainsworth of BWCI in the
Channel Islands. "People buy property or other investments to buy an
income."

America, Australia, Japan and Germany are among the nations that allow savers
to use their pension pots however they like; there is no requirement to buy
an annuity or a drawdown product and they can spend the entire amount
immediately if they choose.

Mr Ainsworth added: "In my opinion, annuities abroad are just as
unattractive as in Britain if not more so."

Drawdown plans are more popular than annuities in Australia. The plans require
you to take a minimum income but there is no maximum. However, pensioners
can take out fixed-term annuities with a portion of their savings when they
get older. A 10-year plan could pay a fixed income of 12pc, for example, but
with no final payment.

Conventional annuities in Australia also offer a feature that would appeal to
many savers in Britain the ability to cancel the contract and receive some
of your money back. "It's a bit like surrendering a life insurance
policy," said Mr Knox. "There may be a penalty, but you are
allowed to bail out although only in the early years."

Ireland offers a similar option called an "approved retirement fund".
The minimum income you can take from it is 5pc and there is no upper limit
as long as you have at least €12,700 a year (£11,100) from other sources of
guaranteed income. This is less onerous than the equivalent threshold in
Britain, which is £20,000 a year.

"Savers with bigger funds tend to take this option, whereas those with
smaller pots usually want certainty and buy an annuity instead," said
Mr Mooney. Pensioners who opt for drawdown initially can use their fund to
buy an annuity at any time.

Ros Altmann, the pensions campaigner, said: "I am really concerned that
British pensioners are being locked into very poor value annuity rates,
which will consign them to a much poorer retirement than they deserve.

"The UK system, which encourages people to put all their retirement
savings into one very expensive, irreversible financial product, is
potentially short-changing millions of our pensioners relative to those in
other countries who are not annuitising.

"In addition, if pensioners have locked all their pension money into an
annuity, they will have nothing left over in case they need to fund
long-term care. Annuitisation is a very old-fashioned idea which does not
fit well with modern retirement needs. Other countries seem to have a much
more sensible approach, leaving more flexibility and choice for their
retirees."

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